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Why Vanguard Founder Jack Bogle is Worried That America is Becoming Too Much of a Democracy

Jack Bogle - Vintage Value InvestingJack Bogle founded Vanguard and helped create the index fund, which right now is completely revolutionizing the financial industry.

You see, the index fund is leveling the playing field and is democratizing investing by giving everyone – whether you’re a small mom & pop investor or a giant pension fund – access to the market average return at very little cost. Hedge funds that can’t consistently beat the market are closing up shop as the evolutionary process of survival of the fittest takes hold and Vanguard – perhaps more than any other asset manager – is benefiting immensely (the company is taking in $1 billion from investors per day).

So it’s surprising that Jack Bogle – creator of the index fund and long-time champion of Main Street – is most worried that the United States is becoming too democratic.

Isn’t democracy a good thing? Isn’t that what America is all about?

Well… not actually.

In a recent interview with CNN,  Jack Bogle covers many topics – from the stock market, to Trump, to how he is so productive at age 88. Bogle also explains why democracies actually aren’t the ideal form of government, and why the United States was never set up to be a democracy.

You can download a transcript of the interview below for FREE (or watch the entire video of the interview – about 16 minutes – at the bottom of this article).

In the interview, Jack Bogle is asked what worries him the most about the future of the United States. His answer: that the U.S. is becoming too much of a democracy. Here Bogle explains what he means:

I worry about political disunity. I worry about us – this might sound funny to you – but I worry about us becoming too much of a democracy, when our Founding Fathers created a republic. Where the people that knew more could help more… were better educated, were the ones that were elected to fill those various posts and various competitions. And now, it’s more like a democracy, where the people speak. And sometimes that can be very unfortunate. I think a good example of the unfortunate thing is the so-called “Brexit.” It’s actually a pure democratic thing – let’s ask the people whether Britain should remain.”

Jack Bogle’s right about the Founding Fathers. The United States was not established as a direct democracy, which is a form of government in which people decide (e.g. by voting) policy initiatives directly.

Rather, the United States is a republic, which is a form of government in which individuals are elected to represent the citizen body, and they decide policy initiatives. (There’s actually a bit of a nuance to these definitions, because the United States is technically a democratic republic, which is still a democracy, just not a direct one – but you get the point.)

But what’s so bad about the United States becoming more of a direct democracy and less like a republic? Doesn’t that mean that policies will more accurately reflect what people actually want?

Well, possibly… But if voters are not adequately informed and educated on the issues they are voting on, then you wind up with decisions like Brexit – which Jack Bogle thinks was a huge mistake:

I think it was a terrible mistake. I think the price will be paid for decades, if not even longer. And a lot of dominoes fall – Scotland is now thinking of leaving, and the United Kingdom won’t be united anymore.

So, really, there are so many people who are not taking the time and trouble to think about these issues and they get the same vote as someone who really thinks about and understands it. I’m not saying they would vote differently. But you want a more informed electorate, a more politically aware electorate, an electorate that’s more concerned about their community and not their own interests. And you know in the ideal society that’s the way we should emerge. And the Founding Fathers got it right, and their successors, right up to today, mostly are I think moving troublingly away from the basic values of the country.”

Interestingly, Charlie Munger has made a similar point before. In Munger’s USC Law School Commencement Speech from 2007, Munger told a funny story about there being two types of knowledge – “Planck” knowledge and “chauffeur” knowledge.

The story goes like this:

“Max Planck when he won the Nobel prize and went around Germany giving lectures on quantum mechanics, and the chauffeur gradually memorized the lecture and he said, ‘Would you mind Professor Planck, because it’s so boring just staying in our routines, would you mind if I gave the lecture this time and you just sat in front with my chauffeur’s hat?’ And Planck said, ‘Sure.’

And the chauffeur got up and gave this long lecture on quantum mechanics after which a physics professor stood up in the rear and asked a perfectly ghastly question and the chauffeur said, ‘Well, I’m surprised that in an advanced city like Munich I get such an elementary question, I’m going to ask my chauffeur to reply.’”

The point of that story, according to Charlie Munger, is that there are two types of knowledge in the world:

  • Planck knowledge: These people truly have the knowledge and have paid the dues and have the aptitude.
  • Chauffeur knowledge: These people have learned to prattle the talk, they have a big head of hair, and a nice voice, and they make “a hell of an impression,” but in the end they just have chauffeur knowledge.

It’s important to get the opportunities and the power to make decisions into the hands of people with Planck knowledge, and out of the hands of people with chauffeur knowledge.

This isn’t to say, of course, that politicians in a republic necessarily make better decisions than ordinary voters in a democracy – or that they are even more educated or better informed than ordinary citizens. As Jack Bogle points out, Brexit might have happened anyways even if all the voters were properly educated on the issue.

But in an ideal society, voters need to take the time to really think about and understand issues before voting on them.

Again, you can download a transcript of the interview below for FREE – or keep scrolling to watch the entire video interview.

The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns

by John C. Bogle

“There are a few investment managers, of course, who are very good – though in the short run, it’s difficult to determine whether a great record is due to luck or talent. Most advisors, however, are far better at generating high fees than they are at generating high returns. In truth, their core competence is salesmanship. Rather than listen to their siren songs, investors – large and small – should instead read Jack Bogle’s The Little Book of Common Sense Investing.” – Warren Buffett, Chairman of Berkshire Hathaway, 2014 Annual Shareholder Letter.